Q3 2024 Corning Inc Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Corning Incorporated Quarter through 2024 Ernens Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the sessions, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand and phrase.
Speaker Change: To rejoice your question, please first start one one again. Please be advised that today's conference is being recorded.
Speaker Change: It is my pleasure to introduce you to Ann Nicholson Vice President of Investor Relations. Please go ahead.
Ann Nicholson: Thank you, Delim, and good morning, everybody. Welcome to Corning's third quarter 2024 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, and Ed Schlesinger, Executive Vice President and Chief Financial Officer.
Ann Nicholson: I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially.
Ann Nicholson: These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to gap data. Our core performance measures are non-gap measures used by management to analyze the business.
Ann Nicholson: For the third quarter, the difference between GAAP and Core EPS primarily reflected non-cash, mark-to-market adjustments associated with the company's translated earnings contracts and Japanese yen-denominated debt, constant currency adjustments, and non-cash asset write-offs and charges.
Ann Nicholson: As a reminder, the mark-to-market accounting has no impact on our cash flow.
Ann Nicholson: A reconciliation of core results to the comparable gap value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast and we encourage you to follow along.
Speaker Change: Now, I'll turn the call over to Wendell.
Wendell Weeks: Thank you, Ann, and good morning, everyone.
Wendell Weeks: Today we announce strong third quarter 2024 results.
Wendell Weeks: Year over year, sales grew 8% to $3.73 billion.
Wendell Weeks: and EPS grew 20% to $0.54.
Wendell Weeks: Our Quarter 3 outperformance was led by optical communications, where continued strong adoption of our new optical connectivity products for generative AI drove 55% year-over-year growth in the enterprise portion.
Wendell Weeks: of the segment.
Wendell Weeks: and EPS to continue growing faster than sales. And Ed will elaborate more on that in a moment.
Wendell Weeks: Overall, our results and outlooks show we're making strong progress on our Springboard plan to add more than $3 billion in annualized sales with powerful incremental profit and cash flow.
Wendell Weeks: and to achieve an operating margin of 20% by the end of 2026.
Wendell Weeks: So before Ed and I get into the details, let me just briefly recap the primary elements of Springboard.
Wendell Weeks: First, this chart reflects our internal, non-risk-adjusted springboard plan. This is what our business operators are focused on delivering.
Wendell Weeks: There's a lot to take away from this slide.
Wendell Weeks: We have a significant sales opportunity. We're looking at potential growth of $8 billion in annualized sales run rate by the end of 2028, with $5 billion by the end of 2026.
Wendell Weeks: Now remember, this is our internal plan. When we say, it's not risk adjusted.
Wendell Weeks: What we mean is the projections are based on a number of assumptions, including
Wendell Weeks: markets recovering to historical trend lines with continued growth thereafter.
Wendell Weeks: Successful adoption of new innovations across a number of markets and platforms.
Wendell Weeks: and successful execution of all our operational milestones for productivity and for price.
Wendell Weeks: But what we wanted to do was take our $8 billion opportunity and translate it into a high confidence plan for our shareholders.
Wendell Weeks: To do that, first we focused on a three-year time period.
Wendell Weeks: Second.
Wendell Weeks: We probabilistically adjusted for different potential outcomes in each of our market access platforms, including market dynamics, timing of secular trends, successful adoption of our innovations, as well as volume, pricing, and market share across all our businesses.
Wendell Weeks: as well as the potential that some of our markets may go through down cycles.
Wendell Weeks: And this is how we come to the High Confidence Springboard Plan.
Wendell Weeks: to add more than $3 billion in annualized sales and achieve operating margin of 20% by the end of 2026.
Wendell Weeks: It's also important to know that we purposely drew this as a wedge.
Wendell Weeks: We weren't trying to guide every quarter for the next 12 quarters. It obviously will not be a straight line.
Wendell Weeks: But we're also not dealing with a hockey stick. When we built the plan, we expected to see strong growth this year.
Wendell Weeks: And that's exactly what you're seeing in our results.
Wendell Weeks: So, I'd like to take a moment to share two important observations about our performance.
Wendell Weeks: First, we're significantly improving our return profile.
Wendell Weeks: In the third quarter, we again drove sales growth while demonstrating our ability to deliver the powerful incrementals embedded in Springboard.
Wendell Weeks: In the third quarter, sales grew 8% year-over-year.
Wendell Weeks: EPS grew more than twice as fast as sales.
Wendell Weeks: Operating margin expanded 160 basis points year-over-year to 18.3%.
Wendell Weeks: and Gross Margin expanded 220 basis points to 39.2%.
Wendell Weeks: We also generated strong free cash flow of $553 million.
Wendell Weeks: And we continued buying back shares in the third quarter.
Wendell Weeks: Second, we're reaching key strategic milestones that underscore the significant progress we've made against our high-confidence plan.
Wendell Weeks: Let me just briefly summarize the recent milestones in display and in optical.
Wendell Weeks: In display, our springboard plan is centered on maintaining stable U.S. dollar net income.
Wendell Weeks: To achieve this, we are raising glass prices.
Wendell Weeks: Our price actions, in combination with the hedges we have in place through 2026, will deliver consistent profitability in the segment.
Wendell Weeks: We expect to deliver net income of $900 to $950 million next year and to deliver net income margin of 25%.
Wendell Weeks: consistent with the last five years.
Wendell Weeks: Simply put.
Wendell Weeks: Our price increases offset the weaker yen in our hedges, and we expect to maintain the same profitability.
Wendell Weeks: Most importantly, we will continue to be the low-cost technology and market leader in display.
Wendell Weeks: Overall, we're providing a strong base in display for our springboard drills.
Wendell Weeks: In optical communications, our springboard plan is about revenue growth as cyclical and secular trends converge to drive demand for our unique capabilities.
Wendell Weeks: When we introduced our Gen-AI products in June,
Wendell Weeks: We said, we expected to grow our enterprise business at a 25% compound annual growth rate over the next four years.
Wendell Weeks: Looking back to the second quarter, strong demand for our new Gen-AI products drove outperformance, and our enterprise business grew by 42% year over year.
Wendell Weeks: As I noted, outperformance continues. Enterprise grew by 55% in the third quarter versus last year.
Wendell Weeks: That growth reflects the Gen-AI opportunity inside the data center.
Wendell Weeks: We've also introduced a set of innovations to help our customers build a new network to interconnect AI-enabled data centers.
Wendell Weeks: as part of an agreement with Lumen Technologies.
Wendell Weeks: which reserves 10% of our global fiber capacity for each of the next two years.
Wendell Weeks: We recently launched the first outside plant deployment of Corning's new Gen-AI fiber and cable system.
Wendell Weeks: that enables lumen to fit anywhere from 2 to 4 times the amount of fiber into their existing conduit.
Wendell Weeks: This is an exciting new space and we expect to capture other large opportunities.
Wendell Weeks: Optical is also marking important developments with other important carrier customers, Verizon and AT&T. At their broadband strategy event last week, Verizon highlighted their partnership with Corning and said we're delivering technologies that make it easier for them to reach their deployment goals.
Wendell Weeks: We also just announced a multi-year purchase agreement with AT&T to provide next-generation fiber, cable, and connectivity solutions to support the expansion of AT&T's fiber network and help bring high-speed Internet to more Americans.
Wendell Weeks: The agreement, valued at more than $1 billion, builds on a decades-long collaboration between our companies.
Wendell Weeks: AT&T is expanding its network to bring world-class fiber to more people and places across the country.
Wendell Weeks: By using Corning's newest pre-connectorized solutions, AT&T can accelerate its network expansion and enhance network performance while minimizing.
Wendell Weeks: Deployment cost.
Wendell Weeks: They'll leverage our latest additions to our portfolio of connectivity solutions, which are fully compliant with the Build America, Buy America provisions of the Broadband Equity, Access and Deployment Program.
Speaker Change: The program, known as BEAD, is part of the government's efforts to bring high-speed Internet to rural communities.
Speaker Change: Stepping back.
Speaker Change: As you can see, we're three quarters into our three-year springboard plan, and we're making significant progress.
Speaker Change: Our third quarter results demonstrate the sales growth and
Speaker Change: The powerful incremental profit in cash flow we expect to deliver as we improve our return profile and march steadily toward our 20% operating margin target by the end of 2026.
Speaker Change: and we're marking significant milestones along our springboard journey.
Speaker Change: and we have plenty of milestones ahead.
Speaker Change: In optical communications, we expect carriers to return to buying at deployment rates and for their deployment rates to increase and drive growth in 2025.
Speaker Change: And we expect the BEAD program to gather momentum starting in the second half of 2025.
Speaker Change: We have a triple-digit automotive glass business today, and we expect sales in that business to almost triple.
Speaker Change: by 2026.
Speaker Change: We expect recently announced U.S. EPA regulations to force gas particulate filter adoption
Speaker Change: and drive hundreds of millions of dollars of growth for us in the U.S. alone with sales starting in 2026.
Speaker Change: Finally, we plan to launch a new solar market access platform.
Speaker Change: Overall, we positioned our businesses to benefit from a convergence of cyclical and secular trends to drive growth across the company through 2026 and beyond.
Speaker Change: We'll continue to update you as we hit significant milestones.
Speaker Change: Now let me turn it over to Ed for some more detail and perspective on the quarter as well as springboard.
Ed Schlesinger: Thank you, Wendell. Good morning, everyone.
Ed Schlesinger: As you just heard, we had an outstanding quarter.
Ed Schlesinger: Year over year, Q3 sales grew 8% to $3.73 billion, and EPS grew 20%.
Ed Schlesinger: more than twice the rate of sales to $0.54 with operating margin expanding 160 basis points to 18.3 percent.
Ed Schlesinger: We also generated free cash flow of $553 million.
Ed Schlesinger: Our outperformance was led by optical communications.
Ed Schlesinger: Sales grew 36% year-over-year, and sales in the enterprise business grew 55%.
Ed Schlesinger: driven by continued strong adoption of our new optical connectivity products for generative AI.
Ed Schlesinger: We expect our momentum to continue.
Ed Schlesinger: In the fourth quarter, we anticipate year-over-year sales growth to accelerate and EPS to, again, grow faster than sales.
Ed Schlesinger: with sales up
Ed Schlesinger: about 15% to approximately $3.75 billion.
Ed Schlesinger: and EPS up approximately 40 percent.
Ed Schlesinger: in the range of 53 to 57 cents.
Ed Schlesinger: Today, I'll provide more detail on our Q3 results.
Ed Schlesinger: and Q4 Outlook as well as put them into the context of our overall springboard plan.
Ed Schlesinger: As a reminder, a key component of our plan is to deliver powerful incrementals. We have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026 with minimal cash investment.
Ed Schlesinger: and the cost and capital are already reflected in our financials.
Ed Schlesinger: This means that we expect to grow profit significantly faster than sales. And that's exactly what we're seeing in our third quarter results.
Ed Schlesinger: So let's dive in.
Ed Schlesinger: In optical communications, sales for the third quarter were $1.2 billion, up 36% year-over-year.
Ed Schlesinger: And net income for the quarter was $175 million, up 92% year-over-year, as we delivered strong incremental profit on the higher volume.
Ed Schlesinger: In our enterprise business, sales were up 55% year-over-year, driven by continued strong adoption of AI-related connectivity solutions.
Ed Schlesinger: This marks another record quarter in this business.
Ed Schlesinger: and adds to our confidence in our plan to grow enterprise at a 25% compound annual growth rate from 2023 to 2027.
Ed Schlesinger: We also grew year-over-year in our carrier business in the third quarter.
Ed Schlesinger: We're encouraged by new customer agreements, including our recent announcements with AT&T and Lumen.
Ed Schlesinger: Overall, we expect both cyclical and secular drivers in optical communications to sustain growth in 2025 and beyond.
Ed Schlesinger: Moving to display technologies, third quarter sales were $1 billion, consistent with the second quarter.
Ed Schlesinger: Our third quarter volume was down sequentially as panel makers began to lower their utilization rates in the quarter.
Ed Schlesinger: We expect panel makers to continue managing their operations to maintain healthy inventory levels.
Ed Schlesinger: As a result, we expect the glass market and hour volume to decline sequentially in the fourth quarter.
Ed Schlesinger: Longer term, we expect the display glass market to grow at a low single-digit rate, supported by stable TV unit sales and average screen size growing about 1 inch per year.
Ed Schlesinger: As we shared with you at our September Investor Event, we are raising glass prices to ensure we can maintain stable U.S. dollar net income.
Ed Schlesinger: Specifically, we implemented currency-based price increases in Q3. Overall, our customers are experiencing a double-digit price increase in the second half of 2024.
Ed Schlesinger: In total, our price increases offset
Ed Schlesinger: the weaker yen in our hedges and therefore we expect to maintain the same profitability.
Ed Schlesinger: As a result, when we move to our new yen core rate in 2025, we do not plan to recast our 2024 financials.
Ed Schlesinger: As a reminder, we have the majority of our Yen exposure hedged for 2025 and 2026, and we also have hedges in place beyond 2026.
Speaker Change: Wendell Weeks, Edward Schlesinger, Ann Nicholson, Edward Schlesinger, Ann Nicholson, Edward Schlesinger,
Speaker Change: Our hedges are not at the 2024 core rate of 107, but they're much better than the current spot rate.
Speaker Change: We expect to deliver net income of $900 to $950 million next year and net income margin of 25% consistent with the last five years.
Speaker Change: Thank you very much.
Speaker Change: Turning to specialty materials, sales in the third quarter were $548 million, up 9% sequentially, primarily driven by premium glass for mobile devices.
Speaker Change: Net income was $72 million, up 14% sequentially, reflecting higher volume.
Speaker Change: In environmental technologies, third quarter sales were $382 million, down 11% sequentially, reflecting the continued impact of the Class 8 truck down cycle in North America, as anticipated.
Speaker Change: That income of $75 million was down sequentially, reflecting lower volume.
Speaker Change: We expect the heavy-duty market weakness to continue and sales and environmental to remain muted in the fourth quarter.
Speaker Change: In life sciences, sales in the quarter were $244 million, up 6% year over year. Net income was $15 million, up 15% year over year.
Speaker Change: Turning to Hemlock and emerging growth businesses, sales in the third quarter were $298 million, consistent sequentially.
Speaker Change: Finally, I'd like to touch on operating expenses.
Speaker Change: As we've told you in the past, our pay is tied directly to our financial performance.
Speaker Change: This leads to temporarily higher operating expenses in the back half of 2024.
Speaker Change: With that, I'd like to shift gears and put our third quarter results and Q4 guidance in context of Springboard.
Speaker Change: and update you on how we are tracking against the plan.
Speaker Change: This chart shows both our non-risk-adjusted $5 billion sales plan and our $3 billion high-confidence sales plan.
Speaker Change: So, how are we doing?
Speaker Change: Let me first explain the $1.84 billion dot point you see on the chart. Our Q3 2024 sales were $3.73 billion.
Speaker Change: Our Q4 2023 sales, which is our springboard starting point.
Speaker Change: were $3.27 billion. So, our sales were $460 million higher in Q3 2024 than in Q4 of 2023.
Speaker Change: And when you annualize that, you get to $1.84 billion. Therefore, we're currently tracking at a $1.84 billion incremental annual sales or run rate against our $3 billion plus target.
Speaker Change: and that trend continues into quarter four. The additional sequential growth implied in our Q4 guidance increases our run rate in the fourth quarter to $1.9 billion.
Speaker Change: As we shared in September, our springboard plan includes an operating margin target of 20% by the end of 2026.
Speaker Change: This target leads to an improving return profile with profitability growing significantly faster than sales.
Speaker Change: You can see this in our third quarter results, where EPS grew 20% year over year, more than twice as fast as the sales growth rate.
Speaker Change: Additionally, our operating margin was 18.3%. This represents a 200 basis point improvement from our starting point of 16.3% in Q4, 2023.
Speaker Change: Stepping back, we've made great progress against our sales and operating margin targets to date.
Speaker Change: But, please remember, we're only 3 quarters into a 12 quarter plan. Springboard is a milestone-based plan evolving through 2026.
Speaker Change: And finally, we expect to generate significant cash flow over the springboard timeframe.
Speaker Change: because we already have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026.
Speaker Change: For the year, we've reduced our capital expenditures to approximately $1.1 billion.
Speaker Change: So, let me spend a minute on capital allocation.
Speaker Change: Our priorities remain the same. We prioritize investing for organic growth opportunities.
Speaker Change: We believe this creates the most value for our shareholders over the long term.
Speaker Change: We also seek to maintain a strong and efficient balance sheet.
Speaker Change: And we're in great shape here. We have one of the longest debt tenors in the S&P 500. Our current average debt maturity is about 23 years with only 1 billion dollars in debt coming due over the next five years. And we have no significant debt coming due in any given year.
Speaker Change: Finally, we expect to continue our strong track record of returning excess cash to shareholders.
Speaker Change: And because of our growing confidence in Springboard, we started to buy back shares in the second quarter and we continue to do so in the third quarter.
Speaker Change: So, as I wrap up today, I'd like to reiterate that we had an outstanding third quarter.
Speaker Change: We're tracking ahead of our springboard plan.
Speaker Change: We expect continued strong performance in Q4, with year-over-year sales growth accelerating, and EPS again growing faster than sales.
Speaker Change: and we expect to sustain our momentum in 2025 and beyond.
Speaker Change: We look forward to updating you as we continue to make progress.
Speaker Change: With that, I'll turn it back to Ann.
Ann Nicholson: Great. Thank you, Ed. We're ready for our first question.
Speaker Change: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
Speaker Change: And I share the first question, comes from the line of Sameek Chatterjee from J.P. Morgan. Please go ahead.
Speaker Change: How much of that is sort of an incremental opportunity that you're seeing related to some of the existing business that you do with AT&T on an ongoing basis? And sort of a broader question to the FIBOR opportunity is
Speaker Change: Is there something that's fundamentally changed the question we're getting a lot from investors is in terms of fiber Utilization is there something that's fundamentally changed that?
Speaker Change: is going to drive a significant cycle on the fiber side just because fiber utilization has changed over the last few years. Can you help us think about that more on a longer term basis as well? Thank you.
Speaker Change: And Sameek, a question for you on clarification. When you say fiber utilization, you mean?
Speaker Change: looking at the utilization which is still probably low.
Speaker Change: I totally understand. Thank you, Sneak.
Speaker Change: divide this really into
Speaker Change: Two major sections.
Speaker Change: The first, let's address the AT&T announcement.
Speaker Change: That's really our carrier segment, and it's part of the cyclical upward trend that we identified as part of our springboard plan.
Speaker Change: that we can expect the carrier spring to activate sometime here in the near future.
Speaker Change: We're not calling that yet because we'd like to see a couple more quarters of the actual order rate and the actual deployment rates, but it's certainly encouraging and this is what we mean by one of the cyclical trends.
Speaker Change: in our springboard plan for optical. So encouraging, but we're not yet calling the spring activated.
Speaker Change: to your next question.
Speaker Change: One of the things you've seen with a lot of the announcements.
Speaker Change: Thank you.
Speaker Change: sort of has to do with Gen-AI and interconnecting Gen-AI enabled data centers.
Speaker Change: of that, we are seeing really a different link have to get activated, and therefore using your terminology of fiber utilization on those links between Gen-AI data centers.
Speaker Change: are relatively full. And that's what you saw with the Lumen announcement.
Speaker Change: We'll have to see how Gen-AI develops and how they end up splitting the very large clusters, but that could develop into a very significant growth driver for us going forward, Suneik.
Speaker Change: Thank you. Thank you. I'll pass it on. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Next question. Thank you. Aisha, our next question comes from the line of Matt Nicknam from Deutsche Bank. Please go ahead.
Matt Nicknam: Hey guys, congrats on the quarter. Thanks for taking the question. I guess first, on the 4Q Revenue Guide, if there's any additional color or context you can share in terms of unpacking expectations across the different segments.
Matt Nicknam: And then one follow up on Optical. Can you clarify whether there was any contribution from the Lumen deal in the third quarter, whether that is expected to kick in in the fourth quarter? Just trying to get a sense of that ramp up to the run rate. Thanks.
Ed Schlesinger: Yeah, hey Matt, it's Ed. Thanks for the question. So first on Lumen, no impact in the third quarter and I would say, you know, minimal to no impact in the fourth quarter expected.
Ed Schlesinger: we see that as a 2025, 2026 opportunity.
Ed Schlesinger: And with respect to our guide, as we always do, we factor in a number of potential outcomes across all of our different segments. I think the one thing that's maybe a little noteworthy about the fourth quarter guide is typically we're not seasonally up.
Ed Schlesinger: Q4 versus Q3 were typically flat to slightly down so we're seeing a lot of positive momentum in general you know in particular in optical communications but in general I think that's what's driving us to guide ourselves a little bit above normal seasonality.
Speaker Change: Great, thank you.
Speaker Change: Next question. Thank you. Our next question comes from the line of Stephen Fox from Fox Advisor, LLC. Please go ahead.
Stephen FOX: Hi, good morning, guys. Two questions from me, if I could.
Stephen FOX: Real quick on the cash flows, can you put a little bit of context around the free cash flows you generate in the quarter?
Stephen FOX: I think it was the best I've seen from you guys since 2018 in the third quarter. How do we put that in perspective with future free cash flows or any one-time things we should think about? And then from an optical standpoint, just on the cloud,
Stephen FOX: side of the of the business. Can you give us a little more perspective on the relative momentum versus enterprise and how you think about that momentum into next year? Thanks.
Speaker Change: Hey Steve, let me do the free cash flow one first. So yeah, we agree Q3 was a great free cash flow quarter, very strong.
Speaker Change: capacity, so we're not spending capital at a level where you would have seen us potentially do that in the past.
Speaker Change: and we're converting our income, which is growing, into cash. So, I don't know that every quarter is going to be at this level of conversion, but I do expect us to continue to generate strong free cash flow as we go forward.
Speaker Change: Thank you very much. Have a great day. Thank you.
Speaker Change: Thank you. And on the cloud, Steve.
Speaker Change: As you'll recall, when we looked at the
Speaker Change: Gen AI driver. What we said is we would expect that to drive a 25% compound annual growth rate.
Speaker Change: through 27.
Speaker Change: on that enterprise portion of our optical segment.
Speaker Change: Obviously we are growing a lot faster than that at this time and our momentum is very strong.
Speaker Change: We'll be reflecting more on that when we get together at the
Speaker Change: investor event in quarter one of next year. We'll update with our latest architectural thoughts and our various modeling to see how we feel about that long-term guidance.
Speaker Change: Fair enough. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. And I'm sure our next question comes from the line of Wamsi Mohan from Bank of America. Please go ahead.
Wamsi Mohan: Yes, thank you so much.
Wamsi Mohan: Similar to cash flows, growth margins also were very impressive in the quarter, north of 39%. I'm wondering if you can unpack that a little bit in terms of the drivers there, how much of that was mix versus leverage, given the strength and optical relative to display, you'd think that that would put some mixed pressure, but
Wamsi Mohan: would be helpful to get some context around that and how we should think about that going into fourth quarter. Are we now renormalizing at a higher rate in general for gross margin? Thank you so much.
Speaker Change: Yeah, thanks Wamsi. So I think what's really driving it is operating leverage, you know, consistent with how we've been sharing our view on Springboard.
Speaker Change: We have the cost and the capacity in place,
Speaker Change: were experiencing a higher gross margin.
Speaker Change: You know, 39% plus is a great place. I would say my only caution on thinking about it going forward is that not every quarter is necessarily going to be up, but we do think we're, you know, we can go higher from where we are at these levels.
Speaker Change: And all I would add to that, Wamsi, is this, we do expect to see a return profile to continue to improve, and that's how we hit our operating margin target of 20% by the end of 2026.
Speaker Change: Thank you.
Speaker Change: Okay, next question.
Speaker Change: Thank you. Our next question comes from the line of John Roberts from Missouho. Please go ahead.
John Roberts: Thank you. Hemlock received a ChIPSAC award during the quarter here. How are you thinking of... It was all in the semiconductor side, I think, so how are you thinking about semiconductor versus solar in terms of the outlook for Hemlock?
Speaker Change: I think it's a great opportunity for us to do that. We will figure out sort of the timing.
Speaker Change: I don't think you should think about it as necessarily having an impact in the springboard window of time here that we've been talking about, you know, through 2026, we've sort of factored in.
Speaker Change: The cost and capacity that we need to support the sales in that window of time, but it's certainly an upside opportunity to that as we go forward.
Speaker Change: Thank you.
Speaker Change: And I show next question comes from the line of a CF merchant from city. Please go ahead
Speaker Change: Great, thank you, too, if I may. Just on display, you know, you've put in some pricing actions here, just if you could help us understand how your customers are responding to that and expectations for further price increases.
Speaker Change: in calendar 25. And if I may just on OPEX, I know you talked a little bit about elevated levels here, variable compensation. How should we think about these OPEX levels to moderate in the fourth quarter? I think the assumption implies or the guide implies some moderation here.
Speaker Change: Thank you.
Speaker Change: We remain confident that our customers will experience a double-digit price increase in the second half of this year. Our goal as we have shared
Speaker Change: is for us to deliver consistent profitability in display.
Speaker Change: a 25% net income margin next year and generate net income of between $900 and $950 million. As time goes forward, we continue to be quite confident in being able to deliver that.
Speaker Change: Yeah, and ASEAN, OPEX, I think the only thing that I would note other than, you know, what I shared is that when we
Speaker Change: Book our accrual in the third quarter. We did have a catch-up for the first nine months of the year.
Speaker Change: So as our performance has accelerated and we've increased our accrual, we've done that in a catch-up. We don't have to book that catch-up in the fourth quarter, but I would expect our OPEX to be temporarily elevated as well in the fourth quarter.
Speaker Change: Next question.
Speaker Change: Thank you. And I share our next question comes from the line of Meta Marshall from Morgan Stanley. Please go ahead.
Meta Marshall: Great, thanks. Maybe kind of expanding upon on the gross margins, you know, in the past you guys have talked about 40% being a bogey, but then also said that, you know, 39, just given some of the price increases is
Meta Marshall: is kind of a more appropriate new bogey. I know you guys have talked more in terms of operating margin targets and kind of this 20% operating margin targets. But just how do you think about kind of gross margin leverage into the next year? Maybe as a first question.
Speaker Change: Yeah, so I would say 39% is a great place. We're happy, you know, we delivered that in the third quarter, but I think there's opportunity for us to go up from that level.
Speaker Change: I just would be cautious that it may not be up every single quarter as we go forward.
Speaker Change: And I think, as Wendell pointed out, the 20% operating margin target as we exit the springboard plan is where we have high confidence, which implies we can do better on gross margin.
Speaker Change: And then, you know, at the event...
Speaker Change: earlier this quarter. You guys had mentioned kind of a lot of kind of key milestones that may be coming.
Speaker Change: on
Speaker Change: Thank you.
Speaker Change: kind of
Speaker Change: the hemlock business or just how to think about incrementals on the project springboard. I noted that you guys got the TIPS Act funding kind of earlier this week, but just anything else or any updates that we should be thinking of in terms of timing there or kind of TBD.
Speaker Change: We continue to make progress on hitting the milestones we need to, to launch a new solar map.
Speaker Change: for us, and Scott will add significantly.
Speaker Change: It's a significant part of our springboard plan.
Speaker Change: especially the
Speaker Change: on risk-adjusted portion of it.
Speaker Change: We would expect to be able to.
Speaker Change: provide you with a relatively detailed explanation of the various pieces and we would expect to have the major milestones in place by the around the timing of our IR event, our investor event, in the first quarter of next year.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And I assure our next question comes from the line of Martin Yang from Oppenheimer. Please go ahead.
Martin Yang: Good morning. Thank you for taking my question. One question on CAPEX. Can you talk about some of the puts and takes and what led to the slight reduction in CAPEX guidance for the year?
Speaker Change: I would say we're not necessarily adding much capacity. We have some small capital projects that we're finishing up. I don't think there was anything, you know, specific to note in the guidance reduction, mostly just where we're running, so we wanted to make sure people understood that. And, you know, we continue to believe we have the capacity in place to support at least the three billion in sales. If that changes or we have any other plans, we'll certainly share that.
Speaker Change: Thanks guys.
Speaker Change: Next question.
Speaker Change: Thank you. And I show the next question comes from the line of Josh Spector from UBS. Please go ahead.
Speaker Change: Hey guys, this is James Cannon, I'm for Josh. I just wanted to say congrats as you guys are still tracking well ahead of that three billion dollar plan.
Speaker Change: But I just wanted to ask on
Speaker Change: kind of going along with the CapEx thing.
Speaker Change: At what point in terms of sales growth would you need to start ramping CapEx back up?
Speaker Change: If you guys continue on this trajectory, should we be assuming that you'll have to start ramping up sooner than...
Speaker Change: kind of 2026.
Speaker Change: Thank you.
Speaker Change: So to deliver the springboard plan, we don't anticipate a significant
Speaker Change: Thank you.
Speaker Change: If, of course, the $8 billion begins to look more and more probable, that could generate some more investment on our part in terms of capacity.
Speaker Change: What you see in our capital today is much more aimed at continued productivity improvement.
Speaker Change: as well as reconfiguring some of our factories to produce some of our new Gen A.I. product sets. So it's cost a lot less for us.
Speaker Change: to tailor our equipment.
Speaker Change: and to upgrade.
Speaker Change: than it does to put in place a significant new plant and equipment.
Speaker Change: Non-risk adjusted
Speaker Change: of Revenue Run Rate, I would say we have an appropriate amount of property, plant and equipment in place and that our capital plans will continue to be relatively modest.
Speaker Change: Got it. Thank you.
Speaker Change: Next question.
Speaker Change: Thank you. Our next question comes from the line of George Nutter from Jeffrey's LLC. Please go ahead.
George Nutter: Thank you.
George Nutter: Hi guys, thanks very much. I guess I just wanted to ask about the display price increases. You know, I think as you guys were hedging the business at 107 on the yen,
Speaker Change: Those hedges were in place through the end of this year.
Speaker Change: Yeah, you were able to institute price increases here at Q3. I thought that was quite impressive. Could you give us a sense for how that conversation went with customers, what kind of leverage you have in the relationship, anything you can tell us about your ability to institute price increases even ahead of the hedges running off? Thanks.
Speaker Change: A price increase is aimed at maintaining
Speaker Change: stable U.S. dollar net income.
Speaker Change: And that's exactly what we're doing, and that's what you see with our customers experiencing a double-digit price increase in the back half.
Speaker Change: of this year.
Speaker Change: And what that is meant to do is that price increase will offset
Speaker Change: The Uyghur Yen...
Speaker Change: in our hedges for 2025 and 2026.
Speaker Change: delivering after that move a stable display net income percent of around 25% and the 900 to 950 million dollars expectation we have for the net income.
Speaker Change: Remember, all we're doing here, so, is...
Speaker Change: more appropriately sharing the benefits that our customers get from buying at that yen rate.
Speaker Change: So, of course, any time you increase prices with customers.
Speaker Change: It is always challenging.
Speaker Change: but we've been able to do it successfully and that's what you see in our guide.
Speaker Change: Got it. And then, any sense for where the new hedge rate will wind up as we roll into the next year? Thanks.
Speaker Change: Thank you.
Speaker Change: Yes, but we will plan to share that as we turn the year. We just want to make sure everything is in place and all of our commercial agreements.
Speaker Change: before we are too forthcoming on where our hedges are at.
Speaker Change: Okay, thank you very much. Appreciate it.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And I share our last question in the queue comes from the line of Tim Long from Barclays, please go ahead
Speaker Change: Thank you. Two-parter, if I could, on optical.
Speaker Change: first
Speaker Change: Looks like, yeah, obviously good recovery going on here on the carrier side still meaningfully below the levels We saw a few years ago Could you talk about that piece? Will these new agreements do you think get you back to those?
Speaker Change: 2021-2022.
Speaker Change: levels for the carrier piece over the next year or two. And then secondly, you just
Speaker Change: talk a little bit about the Op Margin, despite being a logo overall based on what we saw in those peak years.
Speaker Change: margins are pretty comparable. So is this all mixed? And does that mean if we move higher from here that we could see above, you know, historic margins for that optical business going forward as the business scales further from here? Thank you.
Speaker Change: Okay, Tim, let me start with Carrier. I think it's too early. First, your observation is correct.
Speaker Change: We are seeing carriers still at a relative cyclical low.
Speaker Change: as we have talked about before, I think it's still a little too early for us to be able to confidently call the turn.
Speaker Change: But, you are quite right in observing that all of these customer announcements show carriers leaning into.
Speaker Change: we have to increase deployments.
Speaker Change: And they're establishing with their
Speaker Change: lead technology, a partner who is us.
Speaker Change: the necessary capacity.
Speaker Change: reservations.
Speaker Change: to facilitate those builds. So you're right, it's very encouraging, but we just don't have enough evidence yet, Tim, to reach a conclusion on that spring is activated.
Speaker Change: And we'll keep you posted as we go forward.
Speaker Change: Yeah, and Tim, on your margin question, I just want to clarify, you're specifically talking about optical.
Tim Long: Yeah, just in the optical business, correct.
Tim Long: So I think the thing to think about is it ties a little bit with what you asked in terms of your first question, right? So our sales are starting to get back close to the peak level, but we haven't yet filled all of our capacity
Tim Long: Right, we have capacity in place to support a higher level. So I actually think we can improve our margins in Optical as we fill that capacity And grow from here, which we expect to do so. I do think our margins accrete up in optical
Speaker Change: Okay, thank you.
Jen: Thank you, Jen.
Ann Nicholson: Thank you, Dilem, and thank you everybody for joining us today. Before we close, I wanted to let you know that we are going to attend the UBS Global Technology Conference on December 3rd, and we'll be scheduling management visits to investor offices in select cities.
Ann Nicholson: Finally, a web replay of today's call will be available on our site starting later this morning.
Ann Nicholson: Once again, thank you all for joining us.
Speaker Change: DeLemme, that concludes our call. Please disconnect all
Speaker Change: lines.
Dilem: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.